Those who have very little experience running a business might struggle with a lot of the financial concepts that are new to them, but they still understand that the main objective of all is to make money. So it is common for them to push all of their business practices towards increasing their revenue stream no matter what. But while this aggressiveness might initially make their bank account balances go up, it won’t stay that way. To make money, a company has to spend money. And the extra expenses can sink a company fast. So this article will discuss a better type of business practice that is more practical.
What’s the Bottom Line?
Instead of focusing on only a heavy stream of revenue flowing in, a company has to consider something called the “profit margin.” This refers to the amount of cash that is left over after all of the expenses have come out. Usually, it is written in the form of a percentage. But a dollar amount that is easier to understand can be determined too.
How is the Profit Margin Calculated?
There are many financial equations available for business owners to use in determining how well their company is doing. But while many of them are so complicated that they require an accountant to use them, this one is easy. All a business owner has to do is subtract the total expenses from the total income for a dollar amount. To achieve a percentage, this dollar amount can be divided by the total revenue that has been achieved.
Why is Profit Margin Important?
Knowing how much money remains after all of the expenses have come out is important. It shows how well the business is doing. Companies operating with a high level of expenses because of the nature of their business need it the most, such as those in the technology or restaurant industries. When they know that they can safely pay their bills regularly, and still have money remaining, they can avoid bankruptcy.
In conclusion, it is more important for businesses to focus on increasing their profit margin than on simply increasing their revenue stream. The profit margin can be calculated by subtracting the total expenses from the total revenue. It can also be turned into a percentage if one is needed. Tracking the profit margin requires a little more time, and a better budgeting plan than just watching the bank balance. However, it is worth it in the long-run because it will help businesses avoid bankruptcy.